A bright spot likely to get brighter

A huge buildup thanks to war and Republicans

Defense

January 12, 2003|By Robert Little | Robert Little,SUN STAFF

John Douglass' presentation contained all of the typical bear market horrors - the tales of declining revenue, the warnings about terrorism, a long procession of charts and graphs, each one of them pointing south.

But unlike executives in most businesses, the president of the Aerospace Industries Association offered his annual assessment with a smile and no dispiriting predictions of impending doom.

The American economy has turned foul, Douglass said. But the defense industry will hardly notice thanks to the renewed prominence of two old and loyal friends in Washington: war and Republicans.

"This is a difficult economic environment, for everyone," he said. And yet, "when you add it all up, the bottom is not falling out of the industry."

The Aerospace Industries Association estimates that about $138.4 billion will be spent this year on airplanes, missiles, rockets, satellites and related products. If correct, spending will decrease nearly $10 billion from last year.

But virtually all of the decline is attributed to the dismal state of the country's airlines and the commercial aviation industry. A nation that recently produced more than 600 large civilian aircraft a year will build 250 to 300 this year. An industry that expected to be producing 70 commercial satellites a year sold a total of two last year, according to the association.

The attacks of 2001 and the continuing terrorist threat around the world have created a "creeping crisis" that threatens to undermine a decade of growth in the nation's commercial aviation business, Douglass said.

"Those 19 hijackers are probably going to go down in the hall of flame of terrorists," he said. "They have really hurt this nation economically, and they certainly hurt this industry."

Yet thanks largely to the same situation, companies whose largest customer is the Defense Department can expect to pick over a federal spending plan of nearly Reagan-like proportions.

The Bush administration, even faced with revenue shortfalls and a growing federal deficit, wants to spend $378 billion on defense in the 2004 fiscal year, which begins Oct. 1. The current defense budget is just over $364 billion.

Renewed government interest in expensive concepts like missile defense, surveillance and pilot-less flight - and the possibility that old weapons and systems will be expended in and over Iraq - make for rosy projections.

"The long-term prospects for the defense industry remain extremely bright," Northrop Grumman Corp. Chief Executive Officer Kent Kresa said in a discussion with reporters and analysts late last year. "We are confident in Northrop Grumman's future growth prospects."

Northrop Grumman expects to declare $17 billion in sales for 2002, and as much as $19.5 billion in 2003. Add in the sales from TRW Inc., acquired in late 2002, and this year's revenue increases to $26 billion. Kresa said he envisions $30 billion or more in sales by 2005.

Much of that business will be born in Linthicum, the headquarters of Northrop Grumman's largest division. Besides designing and building the radar and electronics for the Air Force's F-16, F/A-22 and F-35 aircraft, the Baltimore-area plant will play a role in space-borne surveillance and missile defense.

Lockheed Martin Corp. is similarly positioned, expecting revenue of $26 billion in 2002 and as much as $28 billion in 2003. The Pentagon is ordering fewer of Lockheed Martin's F/A-22 Raptor aircraft because of soaring development costs, but the company enjoys heightened prospects in the military space and technology business.

Locally, Lockheed Martin continues to produce and develop the MK41 missile launcher in Middle River - a system whose long-term future has been cast into doubt, but which is the only shipborne launcher contemplated for Bush's proposed missile defense system.

General Dynamics Corp. expects to report $14 billion in revenue for 2002, and growth in 2003 and beyond. The Army delayed financing for two brigades of the company's Stryker combat vehicles, a joint program with General Motors Corp. But General Dynamics is confident enough in the Stryker's future that it plans to fully acquire the assembly line from GM this year for $1.1 billion.

General Dynamics' plant in Westminster is designing a robotic control system for the Stryker that will enable one driver to operate and command a fleet of the tank-like vehicles.

Middle River Aircraft Systems, an aerospace components manufacturer on Eastern Boulevard, has been offsetting its lost commercial work with contracts for the Air Force's C-5 transport, the Marine Corps' tilt-rotor V-22 Osprey and other military orders. The company hopes to win a contract to build thrust reversers for a fleet of Air Force tankers, built using Boeing Co.'s 767 design, that the Pentagon is expected to order this year.

The company also has used the lull in commercial work to develop and pursue new types of engineering and design jobs. It won a contract late last year to build engine nacelles and other components for a fleet of Chinese commercial jets - the first such work that the plant has performed.

"It's a very, very difficult marketplace, but it's cyclical," said Michael Chanatry, general manager of the Middle River plant. "It's a good time to be doing the investment programs because you're not missing out on any production. We've been focusing on developing technology, and these are exactly the types of programs we wanted."

The hardest hit of the nation's large defense companies is most likely Boeing Co., which expects its revenue to drop from $54 billion in 2002 to $50 billion this year - due almost entirely to a "severe downturn" in the commercial aircraft market.